According to the latest data from the foreign exchange markets, speculative investors are displaying the highest level of optimism towards Pound Sterling since before the Brexit vote, indicating a bullish sentiment.
The Commodity Futures Trading Commission (CFTC) reports that speculative investors increased their net number of 'long' contracts on the British Pound by an additional 5,000 to reach 52,000 in the final week of June.
Jane Foley, Senior FX Strategist at Rabobank, notes that speculators' net GBP longs are now at their highest level since July 2014.
However, the CFTC's Commitment of Traders Report suggests a slight slowdown in the Pound's net buying momentum compared to the previous week when investors positioned themselves ahead of the Bank of England's interest rate decision, which resulted in a larger-than-expected 50 basis point hike.
Interestingly, despite the increased bullish sentiment towards the Pound, its value actually declined following the Bank of England's decision and throughout the start of the new month.
Filip Carlsson, Quantitative Strategist at SEB, suggests that the Pound's movements after the rate hike could be interpreted as a 'buy-the-rumor/sell-the-fact' trade.
Looking ahead, if this view holds true, we may see the trends that were prevalent before the decision resurface, leading to further upside for the GBP.
However, it is important to be cautious about the bullish sentiment surrounding Sterling. The higher the net long position grows, the greater the risk of a significant currency decline due to a 'washout' in positioning.
Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, warns that the GBP, in particular, could be vulnerable to profit-taking as market long positions become overstretched.
Jane Foley of Rabobank believes that the Pound's potential for upside movement will be limited by concerns over rising interest rates at the Bank of England, which could exacerbate the UK's economic growth risks.
Rabobank anticipates weak economic growth, high inflation, significant national debt, and concerns about investment growth in the coming months.
However, Foley points out that the drop in the UK's current account deficit as a percentage of GDP could provide some protection for the Pound, potentially resulting in less volatility if recession fears intensify.
Rabobank's forecast for Pound Sterling by the end of the year is a slightly softer performance against the Euro, with an estimated exchange rate of approximately EUR/GBP 0.87, translating to a Pound to Euro exchange rate of around 1.15.
Regarding the Pound to Dollar exchange rate, the outlook depends primarily on the direction of the USD. Foley suggests that the currency pair will struggle to surpass recent highs, and Rabobank expects it to end the second half of the year lower, in the region of GBP/USD 1.22.
Despite potential challenges, the Pound starts the second half of the year on a positive note. Foreign exchange strategists believe that the UK currency could continue to benefit from elevated interest rates in July.
International investors seeking higher yields are attracted to UK two-year bond yields, which remain near their highest level since 2008. This interest in UK assets helps explain why the Pound outperformed other G10 currencies during the first half of 2023, as noted by Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Ltd.
Goldman Sachs foreign exchange analyst Michael Cahill suggests that the Pound should outperform due to the need for higher real interest rates.
Barclays' weekly currency research report also takes a positive stance on the Pound, as they expect elevated UK interest rates to drive global investor demand for UK assets. Barclays specifically highlights a more positive outlook for the Pound to Euro exchange rate.
